Apple Blows a Raspberry at iPhone Skeptics, May Repatriate Billions of Dollars

Apple earnings call reveals a willingness to repatriate a chunk of its $230 billion overseas cash holding

At the Q1 2017 quarterly earnings call this week, Apple’s numbers showed a cash pile of $246.09, more than $230 billion of which is being held overseas. CEO Tim Cook also mentioned that he expects that the tax reform will be passed by Congress this year.

If anything, that’s an indication that Apple would be more than willing to repatriate its cash horde to the United States. On the earnings call, Cook said:

“I am optimistic on what I’m hearing for some tax reform this year. It seems there are people in both parties that would favor repatriation as part of that….Repatriation is front and center. That is good for the country and Apple.”

One of the biggest reasons Apple has been holding cash outside the country is the high rate of tax it would be forced to pay if it brought it all back to the U.S. However, Cook has been confident for quite some time now that, regardless of who became president, tax reform was very likely to be passed in 2017.

Apple Inc. Q1 2017 Earnings
Source: CNBC

Cook met with Trump’s senior advisor Jared Kushner and Sen. Orrin Hatch last week in D.C., but it is not known at this point whether or not the matter of repatriating Apple’s overseas cash was discussed.

What we do know is that, should a favorable tax situation arise, Apple may well put the wheels into motion to bring back a sizable amount of cash back to the U.S.

Apple (AAPL) Q1 2017 Earnings Review

Apple Inc. Earnings Q1 2017

As for Q1 2017 earnings, Apple saw record-breaking numbers in device sales as well as services revenue growth for the quarter. iPhone sold 78.3 million units during the holiday quarter, bringing in $54.4 billion and contributing – once again – to the lion’s share of their quarterly revenue total of $78.4 billion. As of the reported quarter, iPhone accounts for nearly 70% of overall revenues.

Services came in at a healthy $7.2 billion, but in terms of contributing to overall revenues, it only comes in at under 10%. That’s good news for the short term, but in the long run we’d have liked to see more gains from the services segment. However, services did grow 13% sequentially and 18% year over year, which is yet another step towards balancing Apple’s device-heavy revenue split.

Market-wise revenue growth also came in strong, at 9% year over year for the Americas segment for an overall growth of 3%. China was a disappointment, and declined 12% year over year despite a whopping 85% growth on a sequential basis.

Apple seems to have had a great holiday quarter but, because of this, expectations may have been set at unnaturally high levels for Q1 2018, when iPhone 8 sales are reported.

Ideally, more than iPhone sales growth, we we’d rather see rapid and continued growth in the services segment on the strength of Apple Pay expansion and usage numbers. The more services start contributing towards overall revenues, the more stable Apple’s business model will become.

One point to note here is that iPhone and device sales generally follow a predictable seasonal pattern, and the first quarter of their fiscal year (October to December) typically sees a spike because that’s when the newest models of iPhone are usually launched.

We’ve seen that consistently since 2012, and that’s not likely to change any time soon.

Apple Inc. Earnings Q1 2017
Source: Statista

But the services segment is generally not as highly influenced by the seasonal habits of consumers or specific product launches. That could be one reason that services contribution came in at under 10% despite 13% sequential growth over the previous quarter. The growth itself can be attributed to Apple Pay opening up to several new countries this past year, while Apple Music has been seeing some solid growth numbers as well, adequately supported by iTunes content.

At the Q2 earnings report in three months, we expect to see services at a significantly higher contribution level with respect to overall revenues. That’s inevitable if iPhone sales follow the same trend they’ve been exhibiting for the past five years.

Meanwhile, standalone revenues from the services segment have shown a healthy growth trend of their own.

We don’t ever expect them to go as high as iPhone’s numbers in the short to medium term, but Apple Pay, Apple Music, AppleCare, licensing and other services are already playing leapfrog with iPad and iMac sales over the past few quarters.

It’s only a matter of time before services start to consistently earn more than either device segment (iPads and Macs). When that happens, services will hopefully start getting a lot more attention from the iPhone maker, and take its rightful place as a key long-term breadwinner for Apple Inc.

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